Home > contracts, Uncategorized > Business Law Update: Key Terms to Consider in Business Contracts.

Business Law Update: Key Terms to Consider in Business Contracts.

If you’ve followed my posts for any amount of time, you probably aren’t surprised that I  like reading and writing about the latest Michigan court cases.

Particularly if they are relevant to business or real estate. I always find there are some lessons to be learned.

As another aside – I also like to include photos I took of downtown Grand Rapids, Michigan – overloimg_1360oking Rosa Parks Circle. This one, from today, shows the Zamboni smoothing out the ice for skaters looking to enjoy some weekend ice skating.

The latest case on my mind:

Summit Diamond Bridge Lenders, LLC v Philip R. Seaver Title Company, Inc.

This dispute really has to do with:

Forum Selection Clauses in a Contract.

Backing up a step, why do we prepare written contracts for business transactions?

Contracts are about risk allocation.

In any business transaction, business owners need to  have set in stone terms that answer one question:

who bears what risk?

A Forum Selection Clause would include language indicating that no matter where a dispute about the contract occurred, the contract will be interpreted under (in our case) Michigan law, and the parties agree that any dispute shall only be resolved in _______ County (Typically,  Kent County, Michigan, for my clients.) The parties then would agree to submit to the jurisdiction of said Courts.

Therefore, if your contract contains a forum selection clause, and, for instance, you are owed money by a company in Florida, you would not need to retain a Florida attorney for initiating a lawsuit in Florida. Just initiate the lawsuit in good ole’ Grand Rapids.

So as a general principle, if your business operates in commerce in other states or countries, it is wise to have such a clause.

 

However, the Summit Diamond Bridge Lenders case tells us that although generally such clause is enforceable, it isn’t always the case.

FACTS:

This case involved an escrow agreement with a  forum selection clause that “provides that California law governs any dispute arising from or related to the escrow agreement. The parties also designated the state of California in the agreement’s forum-selection clause.”

Plaintiff brought suit in Michigan alleging defendant, title company, breached its fiduciary duty as escrow agent of the loan funds by dispersing the funds without an approved letter of credit. Id. at page 2.

Defendant filed a motion to dismiss – arguing that Plaintiff sued in the wrong state. California was the proper forum for the dispute under the plain language of the escrow agreement.

The trial Court agreed. It dismissed the case.

The trial court held that California was the proper forum based upon the plain language of the forum selection clause.

The Court of Appeals reversed.

The Court of Appeals noted on page 3 of its decision that “In Michigan, public policy favors the enforcement of such clauses and, absent certain exceptions” citing Michigan Statute, MCL 600.745(3)(a)-(e).

Those excepts are:

(a) The court is required by statute to entertain the action.

(b) The plaintiff cannot secure effective relief in the other state for reasons other than delay in bringing the action.

(c) The other state would be a substantially less convenient place for the trial of the action than this state.

(d) The agreement as to the place of the action is obtained by misrepresentation, duress, the abuse of economic power, or other unconscionable means.

(e) It would for some other reason be unfair or unreasonable to enforce the agreement.” Id. at pg 5, citing MCL 600745(3).

The Court looked to California Law to determine whether or not the forum selection clause applied. California had a statute that ” precluded from bringing suit against a defendant who is a foreign corporation unless …(2) the agreement relates to a transaction involving at least $1,000,00.” Id. at page 4.

Because the agreement does not relate to a transaction involving at least $1,000,000, because defendant only agreed to hold in escrow $700,000 of plaintiff’s funds.

Essentially, the court of appeals held that since California would not entertain the lawsuit – because it did not meet the monetary threshold – the parties couldn’t obtain effective relief in California – satisfying the exception under subsection b.

 

Important Lesson:

1. Understand Your Contract Before Signing. 

Contracts are about risk allocation. In a business relationship you need to decide what risk you are willing to bear, and what risk you will allocate away. I am sure in this case Summit did not foresee a dispute arising, and therefore was willing to bear the risk in the event of a dispute to litigate in California in an inconvenient forum. They were fortunate that an exception applied and allowed them to maintain their suit in Michigan.

2. Understand  Your Contract After Signing.

Your business contract will dictate what your rights and duties are.  Here, Summit had the perceived contractual duty to pursue its dispute in California. However, its attempt to avoid abiding by the contract worked out – but it was costly. It was initially dismissed. It took an appeals court to find that a narrow exception applied.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

Twitter: @JeshuaTLauka

 

 

 

 

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